Fiserv, Inc. (FISV) Earnings Call Transcript & Summary

Some people's eyes are glazed over right now, trying to figure out what the hell I'm talking about, but he brought it up.

Could you do that again but just for soccer?

Yes. Okay, okay. Let's talk about the red card.

On the financials -- I'm moving away from merchants. On the financial...

Oh, please don't.

The financial solutions part of the business, one thing I've always wanted to ask you is when you look across -- now you're breaking out your revenue quite conveniently for us, digital payments, issuing and banking. How do you think about the customers across those 3 lines? Is it the same customers using those 3 -- across those 3 lines? Or do you have a different set of customers who were doing XYZ product versus the other? Is it really just sort of the question of everybody and things?

Yes. Our head of financial solutions said the other day, "Every hour, a client buys another product from us," every hour of the day. So just -- I don't know if that's helpful or not, but it was just like an interesting fact that every hour of the day, somebody is buying -- who already is a client, right? So hold that thought, right? And I think there's a great overlap, although we will have people who buy only debit processing. But then by some odd way, they end up buying credit after that. And then we go have a conversation about deposit and loan systems. So I think our objective is not to have stand-alone clients. Probably 5 years ago, the idea was sell a core and then put a bunch of surrounds around it. Now we've built out a ton of product that allows you to lead with other items. You could lead with debit, you could lead with credit, you could get somebody even on large credit and then they happen to buy Finxact because they're going to do something different. I also think the way we've approached embedded finance, which you probably heard about it, we have this unique situation where we're the only player that I know of. You guys may know of others because you cover a lot more universe than I do that has merchant business and a banking business. And I think that's a distinct advantage. If you think about how many banks buy merchant from us and buy all the products and financial solutions, I think it gives us a strategic advantage. So we get up in the morning thinking -- and this will be what we used to say in merchant, "Our job is to go get more merchants and then sell them more stuff and keep the ones we have." I don't think it's any different in financial solutions. And it kind of gets to why the segmentation, right? If we're going to sell what classically you all would call core, along with debit, credit, digital and a bunch of other, call it, 37 products, what matters is what the totality of that is and the margin of it is and that we got as much as humanly possible. So I'm more focused on the segment, not to outweigh it against one. We want to have great growth rates in all of the 3 subcategories that we talk about, but recognize we go to market a lot of times, sometimes selling 7 to 10 actual products in a bundle. So I don't know if that's helpful to you.

Very helpful.

I'd make one other point. Here's another point. The merchant acquiring business with banks generates revenue for banks, right, the strategic advantage we have, right? CashFlow Central generates revenue for banks. That's a strategic advantage for us. Those are products which are high margin for our bank partners, build tremendous advocacy gives us a strategic position with them as we bring in new products like Finxact, as we think about embedded finance, as we think about what everybody could do. So I think you got to look at the totality of the company, the construct of the company. It -- none of it's happenstance. But if you go back in time, at First Data, we were investors in Finxact because I had a deep belief if you had a merchant business and you had a core, you -- and you had a debit network and you had a credit issuer processor, you could have a great offering for clients and catch them at any point in when they wanted to make a buying decision and then work your way through if you do a good job with them. So I know that was nothing you definitely asked me at all. But I think it's the construction of the joint, and that's why 2 segments. And that's why I think the property is designed in a manner that allows us to be able to continue to grow in the manner we do.

And how do you think of the bank's sort of health and budgets and appetite right now in terms of being active across all these axes you guys are involved in?

So as some of you know, I spent a lot of time in banks. And I was always perplexed early on, on this comment about bank IT spending and what that might forecast to our revenue because that's like part of the underlying fabric of the question. And when you look at what we do, there's not much discretionary items. We're not selling consulting services. We're not an advertising company. We're the core infrastructure of joints, right? We have mission-critical systems. So -- and then we're in the business to help our clients grow their business, right? So for that, we feel the appetite is very large. I think the bigger issue, and I've said this and dependent on what cycle we're in, because that -- it hasn't changed, I don't believe, the major issue is what are the set of issues our clients are working on so they can have the resource to receive what we're sending. I don't think it's an economic issue. It's a human capital issue of deployment that they have on their initiative list. And if you go at our size and scale, it will always kind of level out in my mind because if you got thousands of banks, everybody is on a different journey. So I feel are healthy. We love banks. We're here to help them grow. And I mean, I think we have superior demand.

What about bank consolidation? I personally expected to see a little more small bank consolidation after some of these recent kind of banking crises, but it doesn't seem to have happened. Are you seeing any rumblings about future consolidation? Or is it pretty static right now out there?

I think there's always banks merging. There's always banks and market overlaps and towns and cities across America. They're just not like -- it's not a boom. But that may have to do with a set of things, including where we are in administrative cycles and how simple it is to get deals done and people feeling how they feel about their valuation -- I mean there's a lot of factors in it. It's -- I think there may be -- they're statistically less. I don't think it's thought about less, if that can make sense to you. If you're a bank CEO, you're thinking about that guy is three towns over in Virginia, maybe I should go visit him. That happens still all the time.

Changing channels for a little bit. In Q1 free cash flow, there was a fleeting impact from some green tax credits that you guys purchased. The question is, is that -- talk a little bit about that strategy. Is that something that we should expect on a recurring basis? What was the kind of -- aside from the spread that you're making by doing that, what was...

Well, that's the only reason we're doing it. I mean it's earnings. It's money that was -- and if you really dig into it, we were a leader [ as is ]. We were -- well, I give tons of credit to the crowd, the creative crowd inside the company who found the opportunity. And there was enough spread in it, enough surety in it, enough insurance in it that it was very, very, very good to do. I think they're going to expand over time, meaning the population of these and the pool of people who are getting involved in it. And so it's going to be a race. There's going to be a point that for us, the spread won't make sense. I'm not prepared to declare that point or any of the economics around all of it, but totally accretive. As a shareholder, you want us to do it, we had a unique position in it. But like anything else, as it matures, it will change. And really, yes, there's a cash flow item to it, which will square itself up as we go into the latter part of the year. And obviously, that's in our calculus. But ultimately, I think it's good business when you're our company and you got the assets we do to be able to generate earnings from it. I'm not a forecaster of it, but I can tell you, way more people are interested in it now than when we did it. In some way, I'm proud of that. In some way, I wish I don't want to pay as much attention. But there's buyers and sellers of it. And if you got the asset and you can -- we're not really -- ultimately, our free cash flow is unimpacted. Its impacted on a quarterly basis. If you look at our leverage, you look at our balance sheet, you look at our earnings, we're capable of doing this all the time.

One of the sort of dynamics we picked up at the conference is maybe, just maybe, we're seeing the beginning of the sort of bid-ask spread on M&A start to get a little more rational. I want to ask about capital allocation, M&A, but maybe starting there. What are you seeing out there in the environment? Is there some rationality? Or is there still just kind of wide gap between what the sellers of assets are looking for and what buyers are willing to pay?

Judging from what we bought last year, it was a pretty big spread because if you look at where we put out capital versus historically what we did, so I think there's -- look, there's always this gap, right? The question is -- for the sellers of property, also because the property has gone to a place that the past was better than the future, right? And that's going to come into the calculus. And even -- that matters a lot to us, right? It matters a lot to us. If you ask me, I would have liked to -- I like to buy things and put them on a distribution network and put them on steroids, whether it's Clover or whether it's Ondot, whether it's BentoBox, proven time and time again. I suppose the bid-ask is closer. I suppose it's closer. The question is, it's closer, but is it close enough? Is it rational, reasonable? I mean we have a set of criteria. We work off a grid. We're not going to change. We like accretive, we like accretive. We like the ability to drive growth. We're not buying things to take expense out and grow EBITDA. It's about growing businesses. So I like integrating companies. I've done it my whole life. So I'm not in love with the bid-ask spread. But I'm not prepared to change what we've told our shareholders we do. And our benchmark for capital allocation is the buyback. And we've done things that have performed better than the buyback, and I think that's good. And that's what our shareholders expect from us, and I hope they respect what we do.

You've gotten your multiple increasing nicely, your valuation multiple. Does that make that calculus a little bit different in terms of that hurdle rate in terms of buyback versus M&A? Or is it still...

I don't think so. We're not using our stock, we're using cash. I don't really think of it that way. I mean I don't know of a CEO or a CFO that sits up on anything in any industry and goes out, "I like my multiple is so much. It's not like my multiple is so good. I feel really good about it. It's a good multiple," right? So nobody like their multiple, and there's reasons why because they can look at things that tell them they should have a higher multiple. Now I think the only way you get a higher multiple is just keep doing a really good job. It's not like banking. Banking isn't going to get you there.

Fantastic. Frank, we're out of time.

You bet.

Yes, thanks so much for being here.

That means we're in the ninth inning?

We are in overtime, Frank. Thanks so much. I appreciate it.